WEBVTT - 54: How Trump Did Something Yellen, Draghi Could Only Dream Of 0:00:00.160 --> 0:00:02.320 But knowledge to work and grow your business with c 0:00:02.520 --> 0:00:06.680 i T from transportation to healthcare to manufacturing. C i 0:00:06.760 --> 0:00:10.520 T offers commercial lending, leasing, and treasury management services for 0:00:10.600 --> 0:00:13.480 small and middle market businesses. Learn more at c i 0:00:13.560 --> 0:00:27.080 T dot com put Knowledge to Work. Hello and welcome 0:00:27.120 --> 0:00:31.360 to another edition of the Odd Lots Podcast. I'm Joe Wisenthal, 0:00:31.440 --> 0:00:35.040 Managing editor at Bloomberg Markets, and I'm Tracy Halloway, Executive 0:00:35.120 --> 0:00:39.440 editor at Bloomberg Markets. Uh. Well, Tracy, it's been quite 0:00:39.440 --> 0:00:42.760 a week. You could you could put it that way. 0:00:43.560 --> 0:00:47.480 There was something something about an election somewhere, right, Yeah, 0:00:47.520 --> 0:00:52.760 I remember that election. Uh quite. And not only was 0:00:52.840 --> 0:00:57.200 the election extraordinary for all kinds of sort of political 0:00:57.440 --> 0:01:02.880 and historical reasons. Uh, it's also been an extraordinary aftermath 0:01:03.400 --> 0:01:09.240 We've seen in financial markets, and it's uh, it's completely confounded. 0:01:09.280 --> 0:01:13.480 Basically everything anyone would have predicted going into the into 0:01:13.520 --> 0:01:16.000 the vote, that's right. So we were told that if 0:01:16.040 --> 0:01:19.240 Donald Trump got elected, that was the ultimate, uh sort 0:01:19.240 --> 0:01:22.720 of political tail risk, and it happened, and we got 0:01:22.720 --> 0:01:26.080 an initial market sell off, like right when the results 0:01:26.120 --> 0:01:30.280 started coming in. But at the time of us recording this, 0:01:30.440 --> 0:01:34.360 we've seen markets rebound quite strongly, right right, I guess 0:01:34.360 --> 0:01:36.960 we should say, you know, just in the full transparency, 0:01:37.200 --> 0:01:41.399 we're recording this on a Thursday after the election. The 0:01:41.520 --> 0:01:43.880 podcast people won't be listening to it till a few 0:01:43.959 --> 0:01:47.160 days from now. So if the entire market changes again 0:01:47.720 --> 0:01:50.160 and there's some huge crash or something before you hear this, 0:01:50.640 --> 0:01:54.360 just disregard. Disregard, you can stop listening. You can just 0:01:54.440 --> 0:01:58.360 disregard everything. Such is the world of podcast where we 0:01:58.400 --> 0:02:00.920 have to um where we have to do this in advantage, 0:02:00.920 --> 0:02:03.520 but one other thing. So we didn't get the crash 0:02:03.600 --> 0:02:07.120 that people expected. In fact, markets have been surging. Perhaps 0:02:07.320 --> 0:02:11.720 more interestingly and far more importantly from a financial markets perspective, 0:02:12.040 --> 0:02:15.160 we've also seen a pretty big increase in a long 0:02:15.280 --> 0:02:19.440 term interest rates. Yield on the ten year US Treasury 0:02:19.520 --> 0:02:24.280 is above two percent for the first time since January. 0:02:25.000 --> 0:02:31.560 Other market based measures of future possible inflation have been 0:02:31.600 --> 0:02:35.200 going up. Uh. This is also the people have been 0:02:35.280 --> 0:02:38.079 waiting for a rise in some of these measures for 0:02:38.200 --> 0:02:41.920 quite some time, and in the immediate aftermath of Trump's victory, 0:02:41.960 --> 0:02:45.200 we actually appear to be uh seeing some seeing some 0:02:45.200 --> 0:02:47.240 of these moves. Right, So all it took for inflation 0:02:47.360 --> 0:02:51.840 expectations to come back was the complete political upheaval of 0:02:52.000 --> 0:02:55.359 the United States of America. Right, Yeah, that's all. That's all. 0:02:55.400 --> 0:03:00.760 It took, just a completely stunning political outcome. And where's 0:03:00.840 --> 0:03:05.000 Jenny Yellen and Ben Bernanke and Coroda have been trying 0:03:05.080 --> 0:03:08.520 so hard to get inflation expectations up. Donald Trump seems 0:03:08.600 --> 0:03:11.040 to have accomplished that in about a and he's not 0:03:11.120 --> 0:03:13.680 even in office yet. Amazing, And he's not even in 0:03:13.800 --> 0:03:16.400 office yet. So on that note, I think we have 0:03:16.520 --> 0:03:20.960 the perfect guest for h the Week. His name is 0:03:21.240 --> 0:03:25.079 David Beckworth. He's a research fellow at the Mercadis Center. 0:03:25.520 --> 0:03:29.320 He writes a fantastic blog called Macro and Other Market 0:03:29.440 --> 0:03:34.480 Musings where he talks about monetary policy, uh, inflation, the 0:03:34.520 --> 0:03:37.280 macro economy and all that stuff. And I think he's 0:03:37.400 --> 0:03:41.360 a perfect guest to help us break down some of 0:03:41.400 --> 0:03:44.960 these moves in financial markets that we've seen and what 0:03:45.640 --> 0:04:01.560 traders might be anticipating under a Donald Trump presidency. Let's 0:04:01.600 --> 0:04:04.600 bring in David. David, thank you for joining us, Well, 0:04:04.600 --> 0:04:07.080 thank you for having me on the show. Uh so, 0:04:07.720 --> 0:04:12.000 quite an extraordinary few days in financial margarets, wouldn't you say? 0:04:12.040 --> 0:04:16.240 Absolutely yes? As you mentioned in the intro, Donald Trump 0:04:16.279 --> 0:04:18.840 has done more to make treasury yelds great again that 0:04:19.839 --> 0:04:22.400 Yalen has has tried and be Bernankey tried and tears 0:04:22.400 --> 0:04:26.320 that couldn't accomplish. UM. It is quite shocking, but it 0:04:26.400 --> 0:04:29.000 also speaks to I think one of the things that 0:04:29.120 --> 0:04:32.560 plagued this this past seven eight year period has been 0:04:33.120 --> 0:04:35.880 kind of a swing and risk premiums to one extreme 0:04:35.920 --> 0:04:39.000 of during the boom. I think we were maybe over 0:04:39.080 --> 0:04:42.360 optimistic and we've been stuck in a funk, and maybe 0:04:42.720 --> 0:04:46.479 Trump was the shock uh that we needed it maybe 0:04:46.560 --> 0:04:49.960 to change things around. So let's talk about this stuff, 0:04:50.040 --> 0:04:54.239 because you know, people like to talk about the FED 0:04:54.480 --> 0:04:58.320 having an inflation target, and the FED in the US, 0:04:58.400 --> 0:05:02.840 the central bank is supposed to target stable prices UH 0:05:02.880 --> 0:05:07.479 and full employment. They've aimed for this two percent inflation 0:05:07.640 --> 0:05:11.240 target UH for years and haven't really been able to 0:05:11.440 --> 0:05:14.880 hit it, except very briefly. They've done all kinds of 0:05:15.160 --> 0:05:21.040 UH stuff. They've tried QUEI, they've tried forward guidance, they've uh, 0:05:21.080 --> 0:05:24.599 you know, hinted at other sort of extraordinary policies going forward. 0:05:24.680 --> 0:05:27.840 They have all these dots and press conferences, all these 0:05:28.000 --> 0:05:32.880 UH all these new innovations designed to uh keep prices 0:05:32.880 --> 0:05:36.599 stable and boost inflation. It's never worked. And we joke 0:05:36.760 --> 0:05:40.279 about Donald Trump having done more to accomplish this in 0:05:40.480 --> 0:05:43.760 uh forty eight hours after being elected than the central 0:05:43.760 --> 0:05:46.480 bankers have done. But it's not really a joke. So 0:05:46.520 --> 0:05:51.560 what is it about, um, his win that seems to 0:05:51.680 --> 0:05:55.800 have jolted financial markets? And what does it say? Well, 0:05:55.839 --> 0:05:59.160 I think it speaks to understand that I've actually developed 0:05:59.160 --> 0:06:03.000 over these past years, and that is FED policies really 0:06:03.040 --> 0:06:08.839 constrained by what the body politic wants. So um, you know, 0:06:08.880 --> 0:06:11.400 if if it's the FED, think of the FED trying 0:06:11.440 --> 0:06:13.800 to to hit two percent inflation. I think there's some 0:06:14.080 --> 0:06:17.280 reasons inside the FED, maybe there's inertia, um that there's 0:06:17.400 --> 0:06:19.440 a conservative nature to the institution. But I think a 0:06:19.480 --> 0:06:22.880 bigger issue is what if the set could have hit 0:06:22.960 --> 0:06:25.760 say two percent inflation with a button And maybe they couldn't, 0:06:25.760 --> 0:06:28.680 But what if they had tried the webpaid overshot their 0:06:28.720 --> 0:06:31.480 target as some people have advocated, I think it would 0:06:31.480 --> 0:06:35.080 have been very politically controversial. Um Bernankee. If you recall 0:06:35.160 --> 0:06:38.080 in two thousand and ten, he had congressional hearings right 0:06:38.880 --> 0:06:41.279 around the time of the que two, he got railed 0:06:41.360 --> 0:06:44.040 for debasing the currency, and if you look at core 0:06:44.080 --> 0:06:46.760 inflation was one percent, then just the threat of it. 0:06:47.279 --> 0:06:49.760 So one thing I think that really we tend to 0:06:49.800 --> 0:06:53.720 overlook is the set is limited or is empowered, as 0:06:53.800 --> 0:06:56.040 much as the public wants it to be. And if 0:06:56.040 --> 0:06:58.560 the public once a low inflation, you know, and they 0:06:58.600 --> 0:07:02.440 revers they expressed that through their uh Congress people, then 0:07:02.480 --> 0:07:05.760 I think that that's going to be um limited. And 0:07:05.880 --> 0:07:08.800 one way to look at what Trump is Trump is 0:07:08.800 --> 0:07:11.360 is a referendum by the public saying, Okay, we can 0:07:11.400 --> 0:07:13.280 try a little bit higher inflation, we can try a 0:07:13.320 --> 0:07:16.040 little bit more rapid accurate demand growth. Now they're not 0:07:16.040 --> 0:07:18.680 saying that explicitly, but by bring him into office, some 0:07:18.760 --> 0:07:22.520 of his proposals for investment spending, um maybe he has 0:07:22.760 --> 0:07:26.880 more reckless nature. Speaks to maybe a change in attitude, 0:07:26.960 --> 0:07:29.600 And I think what that says is it says fiscal 0:07:29.640 --> 0:07:32.000 policy will be easier, it will be a tolerance for 0:07:32.120 --> 0:07:36.000 higher inflation. And that's something the FED couldn't do on 0:07:36.040 --> 0:07:38.360 its own. And that's again kind of one of the 0:07:38.360 --> 0:07:41.680 points I've come to appreciated in theory. The FED can 0:07:41.680 --> 0:07:44.200 do whatever it wants, but in practice that can't because 0:07:44.240 --> 0:07:47.680 there's political constraints. But David, if that's the case, then 0:07:47.840 --> 0:07:51.000 what do you think has driven the change in the 0:07:51.160 --> 0:07:55.720 general attitude towards inflation, Like what's happened over the past 0:07:55.840 --> 0:07:58.400 four years or so to make people ready all of 0:07:58.480 --> 0:08:01.760 a sudden for prices to go up. It's a tough 0:08:01.800 --> 0:08:05.240 story to tell, no doubt, but I think what has happened, 0:08:05.880 --> 0:08:10.320 um agatting, going back to the crisis up until Trump's election, 0:08:10.560 --> 0:08:14.200 is that, UM, there was this this desire for stability. 0:08:14.240 --> 0:08:17.400 The starts are for low inflation. It's partly um the 0:08:17.440 --> 0:08:20.360 result of fed down past success. If you look at 0:08:20.360 --> 0:08:24.320 the history of inflation targeting, it hits the world around. UM, 0:08:24.560 --> 0:08:28.600 we really did need something to rain inflation, and simple 0:08:28.640 --> 0:08:31.520 banks have tried money supply targeting, they tried um in 0:08:31.560 --> 0:08:35.720 different attempts, and inflation targeting seemed to be the best solution. 0:08:36.600 --> 0:08:39.640 Over time. As they've done that, they've gotten better at it. 0:08:39.679 --> 0:08:41.920 I think they've built up the expectation among the body 0:08:42.000 --> 0:08:44.760 politic that this is what we want. We go into 0:08:44.760 --> 0:08:47.839 the crisis, there's all this uncertainty, there's this disaster, and 0:08:47.880 --> 0:08:51.200 the last thing the public wants is to have a 0:08:51.200 --> 0:08:55.079 simple banks tinkering with three or four percent inflation overshooting 0:08:55.080 --> 0:08:58.080 their target. So I think the FED created an environment 0:08:58.120 --> 0:09:01.080 where a low inflation was expected. Warm then you have 0:09:01.160 --> 0:09:03.959 a crisis that people are concerned. They're fearful of big 0:09:04.000 --> 0:09:06.880 institutions like the FED. But then after you know, seven 0:09:06.880 --> 0:09:10.240 eight years of slow, sluggish growth, that longer period of 0:09:10.240 --> 0:09:14.800 people becoming the falling behind economic angst, they want something different. 0:09:14.840 --> 0:09:18.079 So maybe people aren't aren't you know, explicitly articulate in 0:09:18.120 --> 0:09:20.880 their minds, we want higher inflation. But by voting for Trump, 0:09:20.920 --> 0:09:23.960 they want something new. They want something different, and that's 0:09:24.000 --> 0:09:27.880 going to include higher inflation. Um it's it's kind of 0:09:28.120 --> 0:09:33.000 maybe an unconscious quote for higher inflation, higher aggres demand growth. Alright, 0:09:33.160 --> 0:09:35.560 So so I get that, and I you know, I 0:09:35.600 --> 0:09:38.680 get that politics changes, and you know, suddenly we have 0:09:38.800 --> 0:09:42.000 something new. But couldn't it also be as simple as 0:09:42.679 --> 0:09:47.680 fiscal policy really matters to inflation expectations? And and on 0:09:47.840 --> 0:09:50.240 Donald Trump, when he had his victory speech, he made 0:09:50.320 --> 0:09:52.199 a very point. He first of all, he said it 0:09:52.240 --> 0:09:55.800 a lot during the campaign. He said tax cuts, he said, 0:09:55.840 --> 0:10:01.599 double infrastructure spending than Hillary Clinton, um, he said, repatriation 0:10:01.640 --> 0:10:04.560 of foreign cash. There's all this sort of raw money. 0:10:04.800 --> 0:10:08.400 And then in his victory speech he talked about rebuilding 0:10:08.760 --> 0:10:14.120 bridges and hospitals and America's cities and all this is 0:10:14.200 --> 0:10:18.360 a fiscal stimulus, and couldn't it suggest that maybe inflation 0:10:18.679 --> 0:10:22.239 is a h the fiscal side is a big determinant 0:10:22.240 --> 0:10:25.640 of inflation and inflation expectations. And then it's just not 0:10:25.720 --> 0:10:30.520 really about the Fed as much as people thought. So. Absolutely, 0:10:30.679 --> 0:10:32.480 and I think it was neat about this is this 0:10:32.520 --> 0:10:36.440 is kind of a natural experiment to test that idea, right, um. 0:10:36.760 --> 0:10:40.680 If you recall, uh Trump actually said something that sounded 0:10:40.800 --> 0:10:43.520 very much like the m M T school spot um 0:10:43.679 --> 0:10:45.720 a while back during the campaign. He said, look, the 0:10:45.760 --> 0:10:49.360 government can never go broke. You know, he can preparent 0:10:49.440 --> 0:10:51.800 its own money. If the government runs up depths that 0:10:51.920 --> 0:10:53.640 they can just eventually pay off the depth of pretty 0:10:53.640 --> 0:10:56.360 more money, very much of very you know, post Canesi 0:10:56.440 --> 0:10:59.160 and mm T type thinking. And and we're going to 0:10:59.280 --> 0:11:01.160 have a great now will experiment on that. And I 0:11:01.160 --> 0:11:04.080 guess what you can say is the early results, the 0:11:04.080 --> 0:11:06.360 early evidence seems to support that, at least the ford 0:11:06.400 --> 0:11:10.240 looking evidence. But absolutely, and again I'm going back to 0:11:10.280 --> 0:11:13.880 play mentioned earlier. I think it speaks to them then 0:11:14.080 --> 0:11:18.320 the codependency of fiscal policy and monetary policy. Here's another 0:11:18.360 --> 0:11:22.880 way of thinking about this. Imagine the Federal Reserve had 0:11:22.920 --> 0:11:25.200 got a hole in it balance you so imagine, for example, 0:11:25.280 --> 0:11:27.120 some of its assets had lost value, some of those 0:11:27.120 --> 0:11:31.439 more effect securities for whatever reason, um, they suddenly lost value. 0:11:31.480 --> 0:11:33.960 So there was a big hole in the balance sheet. 0:11:33.960 --> 0:11:37.160 There were more liabilities, more monetary base outstanding than there 0:11:37.160 --> 0:11:40.280 were assets. That would create a fear of inflation because 0:11:40.320 --> 0:11:42.720 now the FED couldn't pull all the monetary base in 0:11:42.760 --> 0:11:45.560 in the future. What would happen in that case, what 0:11:45.600 --> 0:11:48.040 would happen is the U. S. Treasury would bail out 0:11:48.040 --> 0:11:50.680 the FED. So should the Fed ever become insolvent in 0:11:50.679 --> 0:11:54.160 the sense that couldn't control inflation of the monetary base, 0:11:54.559 --> 0:11:56.559 the FED would be there. And the way we do 0:11:56.600 --> 0:11:58.360 it the FED would, you know, give bonds to the FED. 0:11:58.440 --> 0:12:00.600 The FED would then use as a pull the monetary 0:12:00.600 --> 0:12:05.040 based out. What that speaks to though, is ultimately the 0:12:05.400 --> 0:12:08.520 FED being able to control inflation depends on the Treasury 0:12:08.640 --> 0:12:12.120 being solving itself. If the Treasury we're having problems with 0:12:12.160 --> 0:12:15.520 budget deficits, and there are concerns about the treasuries financial health, 0:12:16.040 --> 0:12:18.280 it would impair its ability to build a FED out. 0:12:18.320 --> 0:12:21.880 So no matter where we are in time, the Fed's 0:12:21.920 --> 0:12:26.439 ability to control inflation is implicitly backstopped by the Treasury, 0:12:26.440 --> 0:12:29.640 which is fiscal policies. And I so it's going to 0:12:29.720 --> 0:12:33.280 your point if if treasury finances fall apart, if there's 0:12:33.280 --> 0:12:36.080 a change in approach to fiscal policy, it's ultimately going 0:12:36.120 --> 0:12:39.959 to shape expectations about inflation. So yes, Joe, Um, I 0:12:40.240 --> 0:12:43.280 do think it speaks to the important to fiscal policy 0:12:43.400 --> 0:12:46.319 port inflation A right. We have to take a quick 0:12:46.360 --> 0:12:49.640 break for a commercial, but then when we come back, 0:12:49.679 --> 0:12:55.720 I want to dive more into this question. But Knowledge 0:12:55.760 --> 0:12:58.480 to Working grow your business with s I T from 0:12:58.520 --> 0:13:02.240 transportation to health, air to manufacturing. C i T offers 0:13:02.240 --> 0:13:06.080 commercial lending, leasing, and treasury management services for small and 0:13:06.160 --> 0:13:09.000 middle market businesses. Learn more at c I T dot 0:13:09.040 --> 0:13:18.520 com put Knowledge to Work. And we're back with David Beckworth. 0:13:18.679 --> 0:13:22.520 He's a researcher at the Mercadis Center, and we've been 0:13:22.520 --> 0:13:27.000 talking about UH the role of fiscal policy in driving 0:13:27.000 --> 0:13:32.160 inflation and inflation expectations. UH and I want to keep 0:13:32.960 --> 0:13:36.559 hitting this question. I want to drill down further into 0:13:36.600 --> 0:13:40.240 this question because there has been a view out there 0:13:40.520 --> 0:13:45.560 that fiscal policy is essentially impotent on anything having to 0:13:45.640 --> 0:13:49.240 do with total demand and inflation. They talk about Riccardian 0:13:49.280 --> 0:13:52.679 equivalence and that if the government drives up deficits, then 0:13:52.720 --> 0:13:55.199 that'll make people think that there will be higher taxes 0:13:55.200 --> 0:13:57.719 in the future, and so they'll spend less, and ultimately 0:13:58.120 --> 0:14:03.280 that will counteract any stimulative effects of that UH spending. 0:14:03.800 --> 0:14:07.280 And generally, I think it's sort of mainstream economic view 0:14:07.400 --> 0:14:11.720 that the fiscal side of the ledger of you know, 0:14:11.800 --> 0:14:15.800 economic management is not where UH inflation comes from, and 0:14:15.880 --> 0:14:19.840 that it's the you know, inflation is essentially controlled by 0:14:19.840 --> 0:14:23.880 the FED. But it at least seems like a possibility 0:14:23.880 --> 0:14:25.800 that if we do get you know, one of the 0:14:25.840 --> 0:14:28.840 things that's interesting about Trump spending plans is that they're 0:14:28.840 --> 0:14:31.800 not countercyclical in the sense that we're at four point 0:14:31.880 --> 0:14:35.640 nine percent unemployment. UH, there is not obvious that there's 0:14:35.680 --> 0:14:39.520 a huge sort of output gap UH here. It does 0:14:39.600 --> 0:14:41.440 seem like, you know, as we've been talking about, there 0:14:41.440 --> 0:14:45.280 could be a real natural test here where maybe uh, 0:14:45.480 --> 0:14:48.920 the UH fiscal side is really the main driver, and 0:14:48.960 --> 0:14:52.440 the FED just isn't as important as we thought on 0:14:52.480 --> 0:14:54.880 this front. Do you think that's possible that some of 0:14:54.920 --> 0:14:58.400 these assumptions that we had about the significant of the 0:14:58.440 --> 0:15:03.760 FED in control your targeting inflation was overstated? I do. 0:15:03.840 --> 0:15:06.200 I want to be careful and how we'd say this 0:15:07.160 --> 0:15:08.920 kind of what you're referring to. I think is is 0:15:08.960 --> 0:15:11.760 what we've called the Monterrey policy offset right in the past. 0:15:11.800 --> 0:15:15.000 So if fiscal policy, you know, had tried, and I 0:15:15.000 --> 0:15:17.360 think you could, you could argue this is actually would 0:15:17.360 --> 0:15:21.960 fit um Obama's fiscal stimulus, make this concrete large spending plan. 0:15:22.360 --> 0:15:24.440 But you know, we didn't see a huge spike in 0:15:24.520 --> 0:15:26.760 aggurate demand, a huge spike in inflation. You could have 0:15:26.800 --> 0:15:29.320 argued to put a Florida the economy. But you know, 0:15:29.600 --> 0:15:32.000 the conventional view would say, well, the reason that didn't 0:15:32.200 --> 0:15:35.280 happen is because the FED wanted to maintain low inflation. 0:15:35.320 --> 0:15:38.200 So yes, there's a large fiscal stimulus, um, but the 0:15:38.320 --> 0:15:41.480 FED could only tolerate so much inflation. So in general, 0:15:41.840 --> 0:15:44.480 people who called for helicopter drops over the past year, 0:15:45.040 --> 0:15:48.080 um they would run up against the concern that the 0:15:48.120 --> 0:15:50.160 FED might offset it. So the you know, the Treasury 0:15:50.240 --> 0:15:53.160 sends out checks, the household people spend, inflation goes, the 0:15:53.200 --> 0:15:57.040 FED gets nervous. But I think behind both of those, 0:15:57.080 --> 0:15:59.880 really maybe another way of sense behind fiscal policy and 0:16:00.040 --> 0:16:03.480 behind Monterrey policy is lurking. Maybe this again, this this 0:16:03.480 --> 0:16:07.040 this public um acceptance. What does the what will the 0:16:07.040 --> 0:16:11.600 public tolerate? And so maybe by electing Trump, the public 0:16:11.680 --> 0:16:15.080 has has stated clearly we're tired with with the norm. 0:16:15.120 --> 0:16:17.160 We were tired with this tinkering on the margins by 0:16:17.160 --> 0:16:20.240 fiscal policy monetary policy. We want to open up the 0:16:20.800 --> 0:16:22.920 start the engine. Let's get going things going a little 0:16:22.920 --> 0:16:26.680 bit faster. Keep in mind, fiscal policy will affect spending 0:16:27.040 --> 0:16:29.640 and inflation by affecting the velocity. So it's you know, 0:16:29.880 --> 0:16:32.560 you think of you know, money times velocity that's total 0:16:32.720 --> 0:16:35.960 spending in the economy. Fiscal policy generally is gonna work 0:16:35.960 --> 0:16:40.680 through velocity and and pss people to spend faster. Um. 0:16:40.840 --> 0:16:44.280 So it's still a monetary story ultimately, But fiscal policy 0:16:44.320 --> 0:16:47.040 and Montrey policy are interacting, and I think it's reflecting 0:16:47.440 --> 0:16:53.240 the public tolerance level for it. So on that interaction point, 0:16:53.360 --> 0:16:56.480 you suggested early on in the conversation that the FED 0:16:56.640 --> 0:16:59.880 may have been hamstrung a little bit by a general 0:17:00.040 --> 0:17:03.880 reluctance or political reluctance UM to do more in terms 0:17:03.920 --> 0:17:09.200 of boosting inflation UM, and Trump potentially changes that. Um. 0:17:09.240 --> 0:17:12.560 How do you see that relationship between the Fed and 0:17:12.640 --> 0:17:16.760 Trump actually developing? Because there's also been the opposite suggestion, 0:17:16.840 --> 0:17:19.919 which is that if inflation runs too hot, then the 0:17:19.920 --> 0:17:23.679 FED might step in or even um, we saw city groups. 0:17:23.720 --> 0:17:26.760 Matt King suggests that maybe Janet Yellen just kind of 0:17:26.800 --> 0:17:29.760 wants to seek revenge on Trump in some way, and 0:17:29.800 --> 0:17:34.359 so maybe she'll be a reluctant partner in his um 0:17:34.480 --> 0:17:37.879 or an obstacle in his quest to boost inflation. So 0:17:37.920 --> 0:17:41.080 how will that actually play out? Well, that'll be interesting 0:17:41.119 --> 0:17:43.680 to watch if she pulls a pole vulcer on Trump. 0:17:44.160 --> 0:17:49.560 But again I think it would play out um more 0:17:49.680 --> 0:17:52.800 through fiscal policy. It would be One way to look 0:17:52.800 --> 0:17:54.760 at this is, you know, he made tone down, he 0:17:54.840 --> 0:17:57.879 made you know, tighten what the Fed can do. He 0:17:57.920 --> 0:18:00.639 may appoint people there that will be because view that 0:18:00.640 --> 0:18:03.359 he's expressed. You all know, he was very critical to 0:18:03.400 --> 0:18:07.040 said he said that cap rates too low. Um. Again, 0:18:07.080 --> 0:18:09.560 I think we can argue I thought that I definitely 0:18:09.600 --> 0:18:11.280 don't think it was the FEDS results rates were low. 0:18:11.320 --> 0:18:13.320 I think it was more following where the economy is going. 0:18:13.359 --> 0:18:16.080 But he yeah, he's very critical to said, he seems 0:18:16.080 --> 0:18:19.360 to be very supportive implicitly what he's saying about fiscal policy. 0:18:19.480 --> 0:18:22.120 So one way to look at it is he may 0:18:22.320 --> 0:18:27.240 rein in the stads aggressive unconventional policies, but he's gonna 0:18:27.240 --> 0:18:29.400 be you know, hitting the gas pedal on the fiscal 0:18:29.440 --> 0:18:33.160 policy side. And and you know, so they they'll work 0:18:33.200 --> 0:18:36.280 in hand to to lead to this outcome. Um. You 0:18:36.280 --> 0:18:39.320 know someone who's probably be interesting to watch this follow 0:18:39.440 --> 0:18:42.960 over the next year is Judy Shelton. She has written 0:18:43.000 --> 0:18:46.600 some columns for the Watch for the Wall Street Journal 0:18:46.600 --> 0:18:50.199 of the Financial Times, and she's one of his advisors 0:18:50.200 --> 0:18:53.560 on monetary policy. And initially enough, she takes a very 0:18:53.600 --> 0:18:56.760 hard money view, um sympathetic to the gold standards. So 0:18:56.840 --> 0:18:59.840 it is a little bit puzzling how that would reconcile. 0:19:00.440 --> 0:19:04.840 It's almost it's almost as if we don't totally know 0:19:05.040 --> 0:19:08.760 what Trump has got the planned. You could almost say 0:19:08.800 --> 0:19:10.600 it's a he's a bit of a mystery on some 0:19:10.680 --> 0:19:15.280 of these things. I'm being naively optimistic. I mean, we all, 0:19:15.359 --> 0:19:18.320 we all have very little, very few clues to go 0:19:18.359 --> 0:19:20.280 on with this stuff. And that's why I think the 0:19:20.320 --> 0:19:24.480 financial mark, the decisive financial market reaction is so interesting 0:19:25.080 --> 0:19:30.200 because whereas you know, anyone could sort of pull together 0:19:30.280 --> 0:19:32.679 some Donald Trump quotes and try to come up with 0:19:32.720 --> 0:19:35.720 some theory about what he's gonna do economically, Uh, No 0:19:35.760 --> 0:19:37.679 one is totally sure, but there really is quite a 0:19:37.720 --> 0:19:42.119 startling reaction financial markets. I want to ask another question 0:19:42.160 --> 0:19:46.200 about inflation and tell me if I'm just completely off 0:19:46.280 --> 0:19:49.040 base here and if this is nonsense or if there 0:19:49.119 --> 0:19:51.800 might be something to this. It seems to me that 0:19:51.960 --> 0:19:57.000 inflation is lower in really stable economies. So some of 0:19:57.040 --> 0:20:01.960 the some of the most stable countries, and I mean politically, uh, 0:20:02.080 --> 0:20:06.639 Singapore is in his negative cp I growth, Switzerland is 0:20:06.760 --> 0:20:11.120 in has virtually no inflation. Japan, one of the most 0:20:11.119 --> 0:20:15.480 stable countries politically in a sense, hasn't had inflation in forever. 0:20:15.920 --> 0:20:18.119 And then if you look at the countries with a 0:20:18.160 --> 0:20:21.640 lot of inflation, you tend to see much more volatile 0:20:21.720 --> 0:20:30.000 emerging markets with weaker political stability South Africa, Brazil, Turkey, 0:20:31.119 --> 0:20:34.240 the Zimbabwe being the most extraordinary one. Is there a 0:20:34.280 --> 0:20:39.000 connection in your view between um sort of political stability 0:20:39.200 --> 0:20:41.800 and inflation, and is there anything that we can derive 0:20:41.880 --> 0:20:45.840 from that given the appearance apparent decline in the US. 0:20:46.400 --> 0:20:49.760 I think there's two stories behind that. The first one, 0:20:50.600 --> 0:20:52.280 I think it's less important, but it's a part of 0:20:52.320 --> 0:20:54.680 the story, and I'll do that one first. That's demographics. 0:20:54.720 --> 0:20:57.639 So often many of those countries you mentioned, their advanced economies, 0:20:57.680 --> 0:21:00.960 aging populations, they tend to rely more on fixed income 0:21:01.000 --> 0:21:03.000 as they get older. There's a paper of the i 0:21:03.080 --> 0:21:05.879 AM Ethic that when a cross country study and you know, 0:21:05.920 --> 0:21:09.040 the older the average age of the population UM, the 0:21:09.119 --> 0:21:12.119 more constraint again politically a simple bank will be in 0:21:12.160 --> 0:21:14.960 terms of inflation. So on it this speaks to actually, 0:21:15.000 --> 0:21:17.680 I think it's going on in Japan tabonomics. I mean, 0:21:17.760 --> 0:21:20.199 they have an incredible queie. They pushed the limit at 0:21:20.240 --> 0:21:23.680 the what what's possible? Right over there? Their balance she's 0:21:23.800 --> 0:21:27.720 just blowing up like nothing else, and yet inflation remains 0:21:27.840 --> 0:21:31.960 really subdue. They've they've broken you know, the positive number, 0:21:32.000 --> 0:21:34.240 but it's still it's really low, much lower than they wanted. 0:21:34.800 --> 0:21:36.760 And in my view, I think one of the key 0:21:36.800 --> 0:21:40.080 stories in Japan is the politically they can't do this. 0:21:40.119 --> 0:21:44.040 Their population shrinking, it's getting older, um, and that's the 0:21:44.240 --> 0:21:49.280 powerful voting block, and they won't tolerate high inflation that 0:21:49.320 --> 0:21:51.400 each the way they're fixed income. I think that's part 0:21:51.400 --> 0:21:53.919 of the story. There's a demographic issue, which also speaks 0:21:53.920 --> 0:21:56.240 to another reason rates might be low around the world 0:21:56.240 --> 0:21:59.040 in advanced economies. I think a second issue, though, is 0:21:59.040 --> 0:22:01.359 is the difference between you know, these advanced economies and 0:22:01.560 --> 0:22:04.679 the emerging markets. Is the advanced economies again, and I 0:22:04.720 --> 0:22:08.119 mentioned earlier, have had inflation targeting for a longer time, 0:22:08.760 --> 0:22:12.239 and and and it just gets built into expectations. If 0:22:12.280 --> 0:22:15.840 you know, several decades of inflation targeting, everyone comes to 0:22:15.920 --> 0:22:19.320 expect well inflation and anything outside of that is considered devian. 0:22:19.400 --> 0:22:22.239 It's you know, how can you possibly go buck two 0:22:22.280 --> 0:22:25.400 percent inflation even if it's needed, even as the temporary, 0:22:25.400 --> 0:22:28.480 you know, departure. I think we've gotten to the point 0:22:28.480 --> 0:22:31.560 where the body politic and a lot of advanced economies 0:22:31.560 --> 0:22:34.440 will not tolerate a deviation. So I've my writings, I've 0:22:34.520 --> 0:22:38.480 called this the inflation targeting straight jacket. Um. They've been 0:22:38.560 --> 0:22:41.159 so good that they've worked themselves into a corner and 0:22:41.160 --> 0:22:43.000 they can't get out. They don't have the flexibility they 0:22:43.040 --> 0:22:45.760 need during deepercessions. So I think that's I think that's 0:22:45.800 --> 0:22:47.320 the probably the biggest part of the story and advanced 0:22:47.320 --> 0:22:51.919 economies is their own past successes have made them less able. 0:22:52.160 --> 0:22:55.159 And again, Donald Trump, what Donald Trump has done? If 0:22:55.200 --> 0:22:58.720 I continue my inflation straight jacket story, he he's unbuttoned 0:22:58.720 --> 0:23:02.399 that straight jacket. Given the central banks, given macro policy, 0:23:02.400 --> 0:23:06.320 fiscal policies, more degrees of freedom to work. Alright, Uh. 0:23:06.600 --> 0:23:10.920 David Beckworth, research fellow at the Mercadis Center, I think 0:23:10.960 --> 0:23:14.560 this is a great conversation to uh sort of introduce 0:23:14.600 --> 0:23:16.840 people to what I think is going to be a 0:23:16.920 --> 0:23:20.800 really hot economic uh debate over the coming years and 0:23:20.920 --> 0:23:26.359 sort of a real time economic laboratory experiment, particularly on 0:23:26.440 --> 0:23:30.200 the economy. Well, I really appreciate you coming on, David Beckworth. Um, 0:23:30.280 --> 0:23:33.480 you should check out his blog Macro and Other Market Musings, 0:23:33.520 --> 0:23:36.440 And David also has his own podcast Do you want 0:23:36.440 --> 0:23:38.360 to tell us about that real quickly where it's called 0:23:38.400 --> 0:23:43.159